Pizza Teams and Terabytes

Amazon's headquarters look much more prosperous and mature than they did in the late 1990s, when Bezos was fighting the "dot-toast" prediction. Back then the company was on Seattle's skid row. Its old brick building shared a dismal block with a needle exchange and a defunct pawnshop. Bezos flaunted his frugality. He got plenty of flattering press for living in a small downtown apartment and driving a Honda even though his startup had already gone public and he was worth $500 million on paper.

Now Amazon has become a shining city on a hill. As you drive into Seattle, you can look up at its current HQ, a sprawling, ornate, 1920s art deco structure that stands alone atop a leafy ridge. From this high lookout, Amazon's employees enjoy views of Puget Sound and the port, the downtown skyline, the two new stadiums built with the help of Microsoft money, the green hills of Seattle's residential neighborhoods, and the calm blue surface of Lake Washington, where Bezos lives on the Medina waterfront near Bill Gates's enormous $100 million house. Bezos, now worth $5 billion, has shed the modest lifestyle for the mogul lifestyle. Last year his lawyers successfully fought the town's effort to limit house sizes and expansions there, saying that it might restrict his plans. Bezos also owns three linked apartments in the Century, the landmark art deco tower on Manhattan's Central Park West, which he bought from Sony Music mogul Tommy Mottola for $7.7 million.

Bezos's minions are careful to point out symbols of the company's continued frugality despite the pleasantness of the surroundings. The building was a mostly vacant Veterans Administration hospital before Bezos converted it. And all the desks are still modeled after the one Bezos built for himself in the early days (and still uses): a cheap wooden door as the top, connected by metal brackets to sawed-off two-by-fours as the legs. Bezos believes in "conserving money for things that matter," he explains. "If you look at this building, you can open the windows and get fresh air and natural light. Those things actually matter to people. Having a mahogany credenza does not." He laughs powerfully. "There are no mahogany credenzas here. There's no art on the walls. The building is shaped like a T so it has lots of windows. As buildings get bigger, naturally they have more interior volume than they have surface area. That's an unavoidable consequence of geometry!" This is incredibly funny to Bezos. What could be funnier than math? "If you shape a building like a T, or if all the pieces are narrow, you keep the surface area high. That's a great thing about this building."

Amazon still hangs whiteboards in the elevators, as it did back in the skid-row days, when the barely postcollegiate employees were so overcaffeinated and hyperactive that they amused themselves by scribbling away between floors. But Amazon's people are getting older and finally growing up. A large room adjacent to the company cafe, which used to be where employees went to play an array of arcade-style video-game consoles, is now a storage space for old PCs. On Take Your Children to Work Day, the office was filled with kids. Bezos himself, the famed boy wonder, turned 40 this year, and he has two sons, ages 2 and 4, with his wife, MacKenzie. She's a fiction writer; HarperCollins will publish her first book next year. A family friend describes Jeff and MacKenzie as "very playful people," and not just with their sons: The highlight of their wedding reception was outdoor playtime for adults, complete with water balloons.

Bezos dresses in a uniform of blue jeans and a pale-blue button-down shirt. He looks the same at 40 as he did at 30: as bald as a retiree and as thin as a teenager. The laugh seems even larger now than in Amazon's early days, as though he amplified it, consciously or not, in response to the press he got for it. Bezos's personality is "turned up a notch" in public, but it's still authentic, according to Risher, who spent six years at Amazon, the last three as senior vice president for marketing, and currently teaches business at the University of Washington.

If Bezos's personality is decidedly noncorporate, so are some of his ideas about how to run a large organization. One of Bezos's more memorable behind-the-scenes moments came during an off-site retreat, says Risher. "People were saying that groups needed to communicate more. Jeff got up and said, 'No, communication is terrible!' " The pronouncement shocked his managers. But Bezos pursued his idea of a decentralized, disentangled company where small groups can innovate and test their visions independently of everyone else. He came up with the notion of the "two-pizza team": If you can't feed a team with two pizzas, it's too large. That limits a task force to five to seven people, depending on their appetites.

These pizza teams have created some of the site's quirkiest and most popular features. They conceived of the Gold Box, a little animated icon of a treasure chest that gleams and wobbles at the top of Amazon's home page. A click to "open" the box reveals special offers that last for just an hour from the time of the click.

Another popular innovation is Bottom of the Page Deals, daily bargains on staples such as Clif Bars and Tampax. Bezos wanted Amazon customers to think of the site not just for occasional discretionary items — books, CDs, DVDs — but also for daily essentials. The conceit was that the prices (often 50% off on brand names) were so low that they sank to the bottom of Amazon's home page. Patty Stonesifer, a former Microsoft executive who's now an Amazon director, recalls Bezos coming into a board meeting with a cardboard box of sundries, such as toilet paper and packs of batteries, and spilling them onto the table. Stonesifer thought the idea was "innovative, playful, and fun for customers." Days later, the deals were running on the Web site.

The Web makes it easy to try out ideas like the Gold Box and Bottom of the Page Deals, since you can measure results quickly and precisely. The risks and costs are low. What has really distinguished Amazon have been the big gambles, such as Search Inside the Book. This feature lets customers search through the full texts of books and read several pages at a time for free as a way to get them to buy. Search Inside debuted with an astonishing 120,000-plus books. Each one had to be scanned digitally and indexed, a huge logistical challenge at a huge cost. The database took up 20 terabytes, which Bezos says is about 20 times larger than the biggest database that existed anywhere when Amazon was founded.

But a large-scale launch was the only way to see whether it would go over with Amazon's 43 million active customer accounts. "If we had tried it in a tentative way on a small number of books, say 1,000 or 2,000, it wouldn't have gotten the PR and the customers' perception," says Risher. "There's an X-factor: What will it look like in scale? It's a big investment, and a big opportunity cost. There's a leap of faith. Jeff is willing to take those gambles."

Bezos himself explains his modus operandi this way: "For every leader in the company, not just for me, there are decisions that can be made by analysis." He's setting up for the punch line: "These are the best kinds of decisions!" The booming laugh comes on cue. "They're fact-based decisions. The great thing about fact-based decisions is that they overrule the hierarchy. The most junior person in the company can win an argument with the most senior person with a fact-based decision. Unfortunately, there's this whole other set of decisions that you can't ultimately boil down to a math problem." For those judgments, Bezos relies on his most senior executives, whom he regularly recruits from larger companies.

With decisions he deems to be fact-based, Bezos will make an extraordinary effort to study the numbers rather than rely on his team's best instincts and judgments. Amazon conducted a test to see whether it was worthwhile to advertise the brand on television. It picked two markets, Portland and Minneapolis, which blended together to approximate the customer base for the entire country. Then it did no national advertising for 16 months while showing ads only in the two target cities. That was an unusual move, since such tests, which aren't often done by anyone, rarely last for more than three months. "We were unbelievably fixated on it," Bezos says. While the ads did lift Amazon's sales somewhat, Bezos figured it wasn't enough to justify the costs, and instead he decided to put the money into offering lower prices. "That was a long, expensive test," he says, "but we were really determined to understand this for our company once and for all."

"It's one thing to be a data junkie who just looks at history. Jeff takes risks, and he changes and changes."

"One of Jeff's most recurrent phrases when someone has a good idea is, 'We can measure that,' " says Stonesifer. But, she adds: "It's one thing to be a data junkie who just looks at history, but Jeff takes a prospective view. He takes risks and he changes and changes."

Sometimes, Bezos says, you can't rely on facts because it would be too hard to test an idea, or too costly, or you can't figure out how to do it. And "sometimes we measure things and see that in the short term they actually hurt sales, and we do it anyway," he says, because Amazon managers don't think the short term is a good predictor of the long term. For example, they found that their biggest customers had such large collections of stuff — especially CDs — that they accidentally ordered items they had already bought from Amazon years ago. So they decided to give people a warning whenever this was about to happen. Sure enough, the warnings slightly reduced Amazon's sales. But it's hard to study the feature's long-term effects. Would it reduce sales over a 10-year period? They didn't think so. They thought it would make customers happy and probably increase sales. "You have to use your judgment," Bezos says. "In cases like that, we say, 'Let's be simpleminded. We know this is a feature that's good for customers. Let's do it.' "

Amazon faced similar dilemmas with its dramatic moves to cut prices and offer free shipping on orders of $25 or more, which is very costly for the company. "You can do the math 15 different ways, and every time the math tells you that you shouldn't lower prices 'cause you're gonna make less money," Bezos says, laughing inevitably. "That's undoubtedly true in the current quarter, in the current year. But it's probably not true over a 10-year period, when the benefit is going to increase the frequency with which your customers shop with you, the fraction of their purchases they do with you as opposed to other places. Their overall satisfaction is going to go up."

Another decision that defied quantitative analysis was Bezos's move to let third parties compete with Amazon by selling products on what he calls the Web site's "prime real estate": the product-details pages. Now you can see other companies — and many small-timers, including Amazon's own customers — offering the same digital camera side by side with the one Amazon sells, but perhaps at a lower price, or a used copy of a book that Amazon sells new. "The decision was very controversial inside the company," Bezos says. "There was a lot of anxiety around it." Once again, though, Bezos acted from his inherent faith in giving greater choice to customers.

That faith has motivated Bezos throughout the company's history. From Amazon's early days, his vision was "to create the world's most customer-centric company, the place where you can find and buy anything you want online." Within weeks of first publishing customers' reviews of products, Bezos says, "I started receiving letters from well-meaning folks saying that perhaps you don't understand your business. You make money when you sell things. Why are you allowing negative reviews on your Web site? But our point of view is we will sell more if we help people make purchasing decisions."